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Compensation Models for Business Sale Intermediaries

Compensation Models for Business Sale Intermediaries

A common first meeting question at introductory meetings with potential sell side clients for professionals at IBA, the oldest business brokerage firm in the Pacific Northwest, is “What is the cost associated with hiring a knowledgeable, experienced, highly skilled intermediary to negotiate and facilitate the sale of my business?”.  This question like many in life has a spectrum of answers depending on who is selected and the business model employed.

The most straight forward compensation model employed by mergers & acquisitions firms, and the one used at IBA, is a paid on performance compensation model where the business broker is paid a percentage of the sale upon completion of the transaction.  The advantages of this compensation model for business owners desiring the sale of their company include the following:

  1. They have no brokerage fees unless the results they desire are achieved.
  2. The broker is 100% vested in unity with the seller knowing they only get compensated for their time, effort, and expenditures if they complete the transaction.
  3. The broker has a vested interest in achieving the maximum possible value for the business since they get a percentage of every dollar received for the company.

IBA has employed this compensation model for over 44 years in Washington, Oregon, Alaska, & Idaho successfully facilitating over 4000 transactions involving businesses sold for 6, 7, & 8 figures including real estate or in leased locations.  This business model also has resulted in IBA being commonly regarded as the most selective business brokerage firm in the region.  Traditionally, we only take on projects where we believe the business is priced at a value that can be justified to a buyer, their CPA, and a lender and/or investors; the business model has a probability of continuity and success following a transfer of ownership; and we believe collaboration in an environment of full disclosure & honesty is possible with our client and the other professionals on their transaction team.  Historically, if these components are in place IBA completes 80 – 90% of our engagements with successful transactions in the time frame estimated for the project.  The projects we do not complete in the projected time period generally involve businesses where something changes at the company or was not disclosed during our evaluation stage; the business is in a location with low buyer demand; or the business model is not attractive to entrepreneurs.  It is my professional opinion that the most skilled, knowledgeable, and experienced business brokers serving the middle & main street marketplaces employ a straight commission compensation model because for them, as with all highly skilled sales professionals, it is a matter of when not if they will get paid for their time & effort.

All business sale representation projects start at the same place with a valuation of the business.  Paid on performance M&A firms similar to IBA offer this as a complimentary service to potential clients as a method of demonstrating their knowledge, experience, and professional skill and to assess the price & probability of sale for a specific company.    Many business brokerage firms elect not to provide a free professional opinion of business value to potential clients, but instead charge for this service.  The reason they employ this business model is because business valuation done at a professional level takes significant time, energy, experience, and knowledge and can result in a non-engagement by a client comparatively shopping business brokerage firms.  Collection of a fee for the valuation compensates the firm for the time allocation for the assessment.  It also creates cash flow for business brokers who are not closing sales and is a way of getting an entrepreneur to commit at a preliminary level to a business broker, as they are unlikely to pay multiple valuation fees.  Business owners are commonly asked to pay four or five figure fees by business brokerages that employ this compensation model.  Business sellers should be cognizant that some firms produce “boilerplate” valuations with significant extraneous information not relevant to the business or a sale of that entity and provide values above what can be delivered in the marketplace in a “good faith” negotiation to have a happy customer after payment.  I am currently working with a client on the sale of their business that paid $40,000 for a business valuation and to get the project started and never saw a buyer or offer during an extended period of representation.  My assessment of business value for the privately held company resulted in a market value significantly below the value conveyed in the slick, “boilerplate” business evaluation provided the entrepreneur previously.  IBA welcomes comparison shopping of our services with other business brokerage firms serving the middle & main street marketplaces.  We believe a professional representation relationship should be entered into in “good faith” by equally motivated parties from a position of knowledge.

Valuation of the business completed and a price agreed to between the business owner and business brokerage company the next step is to create a marketplace to sell the business.  Firms like IBA pay for marketing & advertising of their projects with anticipation of being reimbursed for that expense at time of sale out of their commission.   Other firms elect to pass the cost and the risk associated with successful completion of the project onto their clients in the form of retainers and monthly fees.  Again, this business model makes sense for a business brokerage in terms of their cashflow.  It also speaks volumes about their confidence related to the timely sale of the business at or near the value it was represented for sale.

A professional opinion of the value of a business provides a “sell now’ value for the business.  Firms like IBA that are paid a percentage of the sale price at closing desire to bring businesses to market and complete transactions to perpetuate their business model.  However, not every business owner is ready to sell their company at the estimated market value for the business provided by a professional mergers & acquisitions intermediary.  This is okay at IBA.  Our goal with our business evaluations is to establish rapport with potential clients and be the party they engage when they are ready to sell.  We are fine if this occurs 1, 3, or 5 years after our assessment of value is provided.  We are also happy to update our evaluations for free for potential clients who are interested in staying current on market conditions.  Some business brokerage firms also provide consulting services to help entrepreneurs prepare their businesses for sale and increase the value.  I have heard some wonderful success stories from entrepreneurs who took this 2 – 5 year path with a reputable firm.  As with hiring any consultant, I recommend vetting the party and asking for references before making a payment or signing a legally binding agreement.

Successful business brokerage firms are owned & managed by entrepreneurs who have developed a business model that works for them.  The compensation model selected for their services allocates risk between the firm and the client.  A paid on performance compensation model allocates 100% of the financial risk to the M&A intermediary firm and the time risk evenly between the parties.  Compensation models that have upfront fees, retainers, and consulting payments allocate more financial risk to the business owner and less to the business brokerage firm.  Successful sales are completed by business brokers employing a spectrum of compensation models.  It is my recommendation that an entrepreneur wishing to sell their privately held company or family business select a compensation model for their business broker that will get them the highest quality professional, motivate the business broker to work diligently and in “good faith” on the project, and allow the business owner to achieve their transaction objectives.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.

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